Is USD-INR Really an Excessively Volatile Currency Pair?

Abstract

The USD-INR currency pair has often been in the news for its excess volatility. This study examines the veracity of this belief by using the extreme value estimator proposed by Rogers and Satchell (Ann Appl Prob 1(4):504–512, 1991) and the VRatio proposed by Maheswaran et al. (J Emerg Mark Finance 10(2):175–196, 2011). The volatility in the USD-INR exchange rate is determined for the period beginning January 2009 and ending June 2015. The volatility of the GBP-INR and EUR-INR currency pairs is also determined for making comparisons. The results show that the EUR-INR and the GBP-INR currency pairs exhibit excess volatility, but not the USD-INR. This result runs counter to the commonly held view. This study also examines the volatility of the three currency pairs using the multiple-days’ time windows for better approximation of Brownian motion while embedding the jumps in the daily opening prices. There is no evidence to support the existence of excess volatility in the USD-INR.

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Fig. 1

Notes

  1. 1.

    Currency composition of official foreign exchange reserves (COFER) data released by International Monetary Fund (IMF) shows that US dollars, Euros and Pound sterling are the most reserved foreign exchange currency by IMF member, non-member countries/economies and other entities. This is because most of the world trade transactions involve these three currencies.

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Correspondence to Parthajit Kayal.

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This research was not funded by any individual or institute.

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Kayal, P., Maheswaran, S. Is USD-INR Really an Excessively Volatile Currency Pair?. J. Quant. Econ. 15, 329–342 (2017). https://doi.org/10.1007/s40953-016-0054-3

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Keywords

  • Excess volatility
  • Foreign exchange
  • Random walk
  • Simulation
  • Extreme value estimator
  • Market efficiency

JEL Classification

  • G12
  • G14
  • G15
  • G17
  • F31